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Eighty per cent of all private capital groups could be zombie firms within the next decade, according to one of the industry’s most senior executives, surviving only to manage existing investments because they cannot raise fresh capital.
Only about 5,000 of the 15,000 or more private capital firms that exist today had successfully raised funds in the past seven years, Per Franzén, chief executive of Sweden’s EQT, told the Financial Times.
“How many of these firms will have a successful fundraising also in the next five to 10 years? . . . Probably less than half,” he said. “The number of zombie firms will increase by an additional couple of thousand.”
Private equity groups have struggled to raise funds in recent years after finding it difficult to return cash to their backers because of a dealmaking drought.
Instead, private equity firms have sought to increase the amount of fees they can generate from existing funds, as well as leaning more heavily on continuation vehicles, a tool that buyout firms use to hang on to some assets by selling them to themselves.
Continuation vehicles have exploded in popularity in recent years and enable firms to generate new management fees on assets that they might have otherwise sold to outside buyers.
These structures could help compensate for a lack of fees from new funds. However Franzén said continuation vehicles were not a long-term solution.
“It’s not a sustainable business model to squeeze out fees out of . . . existing funds and to opportunistically raise continuation vehicles,” he said.
“That’s not going to help you attract and retain the best people in the industry,” he added. “At some point, these firms will cease to exist.”
Just 50 to 100 globally diversified firms would capture around 90 per cent of capital flowing into private markets in the next fundraising cycle, the Swedish executive predicted.
As of October, the number of private equity funds to reach “final close” this year was on track to be the lowest in at least nine years, according to Preqin data.
But Rob Lucas, chief executive of private capital group CVC, said that despite the fundraising difficulties the industry faced, there was nonetheless likely to be an influx of capital.
“If you look at the real headlines of the demand for private capital over the next decade or two, it is immense,” he said.
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Private capital groups have set their eyes on the US retirement market, where the Trump administration earlier this year issued an executive order that enables 401k saving plans to invest in a range of alternative assets.
Firms are also increasingly targeting wealthy individuals as a new source of cash, including through semi-liquid structures listed on public markets.
“There will be firms that regenerate,” said Lucas. “I do think there’s real scope in the market for new firms to form and for the smaller firms to develop.”
